Perspectives

Recession on the cards despite new fiscal stimulus package

EcoPerspectives // 2nd quarter 2020  
7
economic-research.bnpparibas.com  
Japan  
Recession on the cards despite new fiscal stimulus package  
The shock of the Covid-19 pandemic comes hard on the heels of a difficult second half of 2019 for the Japanese economy. Like many  
others, the country is exposed to the economic fallout from this crisis. Its significant economic dependence on China, for imports,  
exports and tourist flows, further weakens the Japanese economy. The latest economic indicators suggest that the shock will be  
important. Japan will thus go into recession this year. Lacking adequate room for manoeuvre on the monetary front, fiscal policy will  
need to provide support. To this end, the Abe government would be preparing a major stimulus package.  
Completed on 7 April 2020 Forecasts: last update on 9 April 2020  
1
- Growth and inflation  
The shock of the Covid-19 pandemic comes at a time when  
economic conditions in Japan were already fragile.  
(
Y/Y, %)  
GDP Growth  
Forecast  
Inflation  
Considerable exposure to the pandemic shock  
2
1
Forecast  
1
The Japanese economy is exposed to the Covid-19 pandemic  
shock via a number of channels : 1) a fall in tourist numbers, with  
February bringing the sharpest drop in the number of people visiting  
Japan since the Fukushima disaster; 2) shortages in supply,  
particularly of metals, as a result of the collapse in Chinese exports;  
0.7  
0.5  
0.3  
0.3  
1
0
1
2
-0.2  
-0.2  
-
-
3) weakening exports to China  these experienced their 15th  
-3  
consecutive monthly fall in February; 4) a lack of consumer  
confidence, which had already taken a knock from the increase in  
VAT in October 2019; and 5) slowdown in the global economy.  
-
-
4
5
-
4.6  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
As in many countries, the latest economic indicators for Japan now  
incorporate the pandemic shock to a large extent. In particular, the  
Purchasing Managers Index (PMI) for March was 35.8, its lowest  
level since the Fukushima disaster in March/April 2011. The  
services sector PMI is at a record low of 32.7. The indicator of  
machine tool orders has also performed very poorly since the  
beginning of the year.  
Source: BNP Paribas Global Markets  
2- PMI index in Japan  
60  
55  
50  
45  
40  
35  
Manufacturing  
Services  
All in all, Japan is therefore likely to go into recession in the early  
part of this year. Any recovery is unlikely to be particularly robust,  
given the continued fragilities in the global and national economies.  
The absence of any clear-cut recovery in tourism and the  
postponement of the Olympic Games will also hit the Japanese  
economy.  
30  
2
5
Support from economic policy, particularly on the  
fiscal front  
0
8
10  
12  
14  
16  
18  
20  
Source : Markit  
The Bank of Japan (BoJ) is fast running out of options in terms of  
monetary policy. At its last monetary policy meeting it held its policy  
rate at -0.1%. The authorities are paying very close attention to the  
effect of negative interest rates on the financial system. The BoJ  
decided, however, to double the volume of purchases of ETFs  
included direct fiscal support (to companies affected and  
households dealing with the effects of school closures) and  
assistance in the financing of companies, particularly SMEs. An  
even bigger programme is now being worked up by the Abe  
government and is likely to be announced in April. Most notably this  
is likely to include the distribution of direct aid to consumers, as was  
previously done in response to the economic crisis of 2009.  
(
exchange traded funds) and J-REITs (Japan real estate investment  
funds), to more than USD110 billion.  
On the fiscal front, there have been a series of programmes since  
the beginning of the year. These were initially fairly limited in terms  
of volume, but the March programme was more substantial and  
1
Covid-19 update 23/03/2020 Japan, DG Trésor, 23 March 2020  
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